Is
Short-Term Bondage really that bad?

We
want freedom and prosperity. Let’s talk
about how saving versus borrowing can gain us freedom and prosperity. We’ve already discussed that debt is a form
of bondage in another article. Borrowing
gives us debt, even if only for a short time.
Is short-term bondage really that bad?
What is the value in saving for a purchase, especially in our recent
economy of low interest rates? Is
financial freedom as simple as delaying a purchase until we have saved the
money for it?

Do
we really want to wait that long?!

Let’s try an example.
Suppose you want to buy a dining room set to replace the folding chairs
and card table you’ve had since college.
You do some comparison shopping, find something you like and go home to
think about it.

Having recently looked at your budget,
you have calculated that you have an extra $60/month that could go toward this
dining room set. The cost of the set is
$600 + tax, say $50. When we divide the
cost ($650) by what we can pay each month ($60), we come up with eleven months
to save. Do we really want to wait that
long?

With
the promise of just 12 easy payments…

Let’s look at another alternative. Let’s assume you have a credit card available
with which to make this purchase and that it has an interest rate of
10.25%. With the promise of just
twelve easy payments of $60, you can take the dining set home today!

So what’s the comparison? I ran the numbers in a spreadsheet below to
compare saving $60 each month in a savings account that earns a mere 0.10%
interest to using a credit card with an interest rate of 10.25% to pay for our $600 dining set ($650
with tax). You can see that you are
paying for borrowing an extra month over saving.

Maybe
an extra 2 months doesn’t seem like that much, after all, it’s only about 10%
more on the cost. Why worry about debt?

Counsel
from a wealthy man to his son…

Shakespeare
is famous for teaching us about principles.
A character of his from Hamlet
said, “Neither a borrower nor a lender be.”
This was counsel from a wealthy man to his son. What’s the principle? Avoid debt.
We can see the wisdom in this counsel when we look at people who have
lost their home due to changes in employment or have had a car or other items
(a dining set?) repossessed for similar reasons. Through no fault of their own, their financial
situations changed overnight, and they were no longer able to meet their
financial obligations.

If
you have saved the money, it’s yours.

If you have saved the money, it’s yours, and what you buy
with it becomes yours. That’s freedom
and prosperity. If you’ve borrowed the
money for a purchase (the car, the house, dining room set,) you are merely
borrowing what you purchase until the final payment is made. That doesn’t sound like freedom or
prosperity.

Change
in the Economic and Financial world

If
the old adage, “The one constant is change” is true, it is especially true in the
economic and financial world. From the
time I started working after college at 22 years to the time I was 36, I had
been laid off from work two separate times and just missed two other
layoffs. I was fortunate that we had no
debt other than our home each time, because I was the sole bread winner in our
family through the first layoff. Because
things in this world are inconstant, it is a safety net for us to save instead
of borrow when considering a purchase.

Consider
the value…

Saving
also gives us time to consider the value of the purchase. The dining set we have discussed is very
useful in a home, but if a car accident gives us costly repair bills or even
medical bills, we could probably make due with the card table and chairs for a
while longer. Think back to our
budgeting exercise. When you plan to
save, you plan what you are saving for.
You are telling your money what to do.
When you make a purchase on credit, your purchase is telling you what to
do, how many hours to work over how many months. Your past purchases even tell you, “No!” to
future purchases as you use up available credit.

It’s
even cheaper to save!

To
recap, is short-term bondage really that bad?
You pay on the dining set an extra couple of months, but couldn’t you
start saving for something else you need or want sooner if you haven’t
borrowed? While it may be inexpensive to
borrow right now, it’s even cheaper to save your money! Lastly, the peace of mind that comes from
wholly owning what you have purchased, of not having the threat of debt hanging
over your head, is something that can’t be borrowed from a credit card company
or the bank. When comparing saving
versus debt, saving is the choice that brings us prosperity and freedom.

Take the Challenge… Is there a loan or credit card that
looks appealing to you right now? Run
some numbers with a calculator or spread sheet to compare the cost of the loan
with simply saving the money. While the
debt will bring the purchase to you now, it will take even longer than saving
for it to actually own the item. Resolve now to save for your next purchase.